THE USE OF STANDARD FORM OF DOMESTIC SUBCONTRACT IN MALAYSIAN CONSTRUCTION INDUSTRY NOR MARINA BINTI ROSLI. Universiti Teknologi Malaysia

Transcription

1 THE USE OF STANDARD FORM OF DOMESTIC SUBCONTRACT IN MALAYSIAN CONSTRUCTION INDUSTRY NOR MARINA BINTI ROSLI Universiti Teknologi Malaysia

2 iii Specially dedicated.. To my parents.. mak & abah To my sisters along & angah To my brothers Abang Z & Shap To my lovely friend...thank you for everything

3 iv ACKNOWLEDGEMENTS First of all, I would like to express my highest gratitude to my supervisor, Assoc. Prof. Dr. Rosli bin Abdul Rashid for his guidance, advice and support in order to complete this master project. Next, thanks also go to all the lecturers for the course of Master of Science (Construction Contract Management), for their patient and kind advice during the process of completing the master project. Also, without the support of my parents, all my family members and my most trusted friends, completing this study would not have been possible. My wish is they all share my happiness. Last but not least, to all my friends, especially Mizah, Kuzex, Ain, Kak Fiza, As, En.As, En.Khairy, En.Z and all classmates 2006/2007. All the best.

4 v ABSTRACT Malaysian Construction Industry has never had any standard form of domestic subcontract. The contract between Main Contractor and Domestic Subcontractor are mainly based on non-standard form drafted by the Main Contractor. Many problems have arise from the use of these non-standard form of subcontract. In September 2006, the CIDB has published the Model Terms of Construction Contract for Subcontract Work with aim to reducing these problems. In relation to these, the objectives of the study are to determine the problems faced by domestic subcontractors associated with the use of non-standard form of domestic subcontract and also to determine whether the use of Model Term will reduce the problems. The study shown that the problems faced by domestic subcontractor due to the non-standard form are problem with payment clause, termination clause, variation and also arbitration. The most frequently problem is problems related with payment clause. Most of the disputes arose because of lack of term and the parties are not fully understand the terms. The study also shows that the Model Term will be able to reduce the problems. For example the payment clause is clearly stated all the right, obligation and duties of the parties. By using the plain English also can help the parties understand the contract they had entered.

5 vi ABSTRAK Industri Pembinaan Malaysia tidak mempunyai borang setara untuk subkontrak domestik. Kontrak di antara kontraktor utama dan subkontraktor biasanya adalah borang yang di rangka oleh kontraktor utama. Terdapat banyak masalah daripada penggunaan borang subkontrak yang tidak setara. Pada bulan September 2006, CIDB telah mengeluarkan the Model Terms of Construction Contract for Subcontract Work dengan tujuan untuk mengurangkan masalah-masalah yang dihadapi oleh subkontraktor akibat dari penggunaan borang yang tidak setara. Berkaitan dengan ini, kajian ini dijalankan adalah untuk mengenalpasti masalah yang dihadapi oleh subkontraktor domestik akibat penggunaan borang yang tidak setara. Kajian ini turut bertujuan untuk mengenalpasti sama ada Model Terms dapat mengurangkan masalah yang dihadapi. Daripada kajian, masalah yang biasa dihadapi oleh subkontraktor domestik adalah masalah yang melibatkan terma pembayaran, terma penamatan, perubahan, dan timbangtara. Masalah yang paling kerap dihadapi adalah masalah pembayaran. Masalahmasalah ini biasanya berlaku akibat dari kelemahan terma dan pihak-pihak tidak memahami terma sepenuhnya. Berdasarkan objektif kedua, kajian ini menunjukkan bahawa Model Term mampu untuk mengurangkan masalah yang dihadapi sebelumnya. Sebagai contoh, terma untuk pembayaran dengan jelas menyatakan hak, tanggungjawab dan tugas pihak yang berkontrak. Dengan menggunakan Bahasa Inggeris yang mudah dan jelas, ini akan membantu pihak yang berkontrak untuk lebih memahami kontrak diantara mereka.

6 vii TABLE OF CONTENTS CHAPTER TITLE PAGE DECLARATION ii DEDICATION iii ACKNOWLEDGEMENTS iv ABSTRACT v ABSTRAK vi TABLE OF CONTENTS vii LIST OF CASES LIST OF TABLES LIST OF FIGURES LIST OF ABBRIEVATIONS xii xv xvi xvii 1 INTRODUCTION Background Studies Problem Statement Objective of Research Scope and Limitation of Research Research Process and Methods of Approach st Stage nd Stage rd Stage th Stage 10

7 viii CHAPTER TITLE PAGE 2 STANDARD FORM OF CONTRACT Introduction Relationship Among The Parties in Construction The Contract The Need for Writing Contract Characteristics of Good Construction Contract Risk Allocation Understand by the Parties Modern, Simple, Clear and Consistent The Project Management Approach Interpretation of Construction Contract Form of Contract Standard Form of Contract Types of Standard Form of Contract Merits of Standard Form of Contract Problems With Standard Forms Non-Standard Form of Contract Conclusion SUBCONTRACTING Introduction Subcontracting Subcontractor Nominated Subcontractor Domestic Subcontractor Provision in Standard Form for Subletting PAM The Malaysian PWD Form of Construction Contract (JKR 203 A) 42

8 ix CHAPTER TITLE PAGE CIDB Standard Form of Contract for Building Works 2000 Edition Nature of Contractual Relationship (Domestic 44 Subcontractor, Main Contractor and Employer) Relations Between Employer and Subcontractor Relations Between Main contractor and 45 Subcontractor 3.6 Issues in Subcontracting Parties Payment Issues Retainage Withheld by General Contractor Bidding Issues Insurance Issues Safety Issues Incorporation by Terms Problems Associated with Domestic Subcontractor Conclusion MODEL TERMS OF CONSTRUCTION CONTRACT FOR SUBCONTRACT WORK Introduction The process of The Model Terms Development Structure of The Model Terms Strategies in Producing the CICC Model Terms of Construction Contract for Subcontract Work First Strategy : Structure of Construction Contracts- The Project Management Approach Second Strategy : Readability and Document Design Third Strategy : Choice of Words Conclusion 66

9 x CHAPTER TITLE PAGE 5 THE PROBLEMS OF USING NON-STANDARD FORM OF DOMESTIC SUBCONTRACT & 65 THE USE OF CIDB FORM OF DOMESTIC SUBCONTRACT 5.1 Introduction 5.2 The List of Cases 5.3 Objectives 1 : The Problems Faced by Domestic Subcontractors Performance Bond Term of Payment Term of Termination Arbitration Clause Additional and Variation Works 5.4 Summary of the analysis (Objectives 1) 5.5 Objectives 2: The Use of CIDB form of Domestic Subcontract 5.6 Summary of the Analysis (Objectives 2) CONCLUSION AND RECOMMENDATIONS Introduction Conclusion Research Constraints Duration of The Research Lack of Cases Related and Discuss about Non- Standard Form of Domestic Subcontract Lack of Published book discuss about the New Model Term of Construction Contract for Subcontract Work 97

10 xi CHAPTER TITLE PAGE 6.4 Recommendations Future Research 98 REFERENCES 99 BIBLIOGRAPHY 104 APPENDICES

11 xii LIST OF CASES Amalgamated Building Contractors Ltd. v. Waltham Holy Cross UDC[1952]2 All ER Brightside Mechanical & Electrical Services Group Ltd. and another v. Hyundai Engineering & Construction Co. Ltd. 41 Build LR D & F Estates Ltd. V. Church Commissioners for England [1988] 2 All ER Dawber Williamson v. Humberside County Council (1979) 14 BLR Geary, Walker & Co Ltd. v. W Lawrence & Sons Ltd (1906) Hong Kong Teakwood Ltd. v. Hyundai Engineering & Construction Co. Ltd [1987] 2 MLJ Interpro Engineering Pte. Ltd v. Sin Heng Construction Co. Pte. Ltd [1998] 1 SLR John Laing Construction Ltd. V. County and District Properties Ltd (1982) 23 BLR 1 at

12 xiii Kum Leng General Contractor v. Hytech Builders Pte. Ltd [1996] 1 SLR Lee v. West [1989] EGGS Mahkota Technologies Sdn. Bhd. v. BS Civil Engineering Sdn. Bhd [2000] 6 MLJ Martin Grant & Co Ltd v. Sir Lindsay Parkinson & Co Ltd (1984) 3 Con LR Metaalhandel J A Magnus BV v. Ardfields Transport Ltd. [1988]1 Lloyd s Rep Mitsui Construction Co Ltd v Attorney General [1987] HKLR Ng Ki Sian v. Petaling Jaya Asset Sdn. Bhd. [1998] MLJU Oii Boon Teong (Trading as Mitsu-Da Construction) v. MBF Construction Sdn. Bhd. [1994] 3 MLJ Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd. (1970) 1 BLR Pyrok Industries Ltd. v. Chee Tat Engineering Co. Ltd. 41 Build LR Redpath Dorman Long Ltd. v. Tarmac Construction Ltd 1982 SC

13 xiv Schroeder Music Publishing Co. Ltd v. Macaulay [1974] 3 All ER 616 at 624, [1974] 1 WLR 1308 at Scott Lithgow Ltd. V. Secretary of State for Defence 1989 SLT Smith and Montgomery v. Johnson Bross & Co Ltd [1954] 1 DLR Tan Ah Kian v. Haji Hasnan. [1962] 1 MLJ Thatcher Engineering Corp v. Bihlman (1985) 473 NE 2d Union Workshop (Construction) Co. v. Ng Chew Ho Construction Co. Sdn. Bhd [1978] 2 MLJ

14 xv LIST OF TABLES TABLE NO TITLE PAGE 2.1 Principle of an Effective Contract Aspects of Subcontracting in Building Construction Classification of Subcontractors in Building Construction Table of Contents of the CICC Model Terms of Construction Contract for Subcontract Work The List of Cases Related with Non-standard Form Summary of the Cases Analysis Problems Faced by Domestic Subcontractor and The Use of CIDB Form of Domestic Subcontract 92

15 xvi LIST OF FIGURES FIGURE NO TITLE PAGE 1.1 Research Process and Methods of Approach Decision Diagram for Disputes Involving Interpretation 20

16 xvii LIST OF ABBRIEVATIONS AC All ER AMR App Cas Build LR Cal LR Ch Ch D CIDB CLJ CLR Const LR ER EWCA Civ FMSLR HL JKR KB Lloyd s Rep LR MLJ PAM PC QB Law Reports: Appeal Cases All England Law Reports All Malaysia Reports Appeal Cases Building Law Reports California Law Review Cases in Chancery The Law Reports, Chancery Division Construction Industry Development Board Current Law Journal (Malaysia) Commonwealth Law Reports Construction Law Reports Equity Reports Court of Appeal, Civil Division (England & Wales) Federated Malay States Law Reports House of Lords Jabatan Kerja Raya King Bench Lloyd s List Reports Law Reports Malayan Law Journal Pertubuhan Arkitek Malaysia Privy Council Queen Bench

17 xviii SCR SLR WLR Session Cases Report Singapore Law Report Weekly Law Report

18 CHAPTER 1 INTRODUCTION 1.1 Background Studies Construction projects can best be understood in the context of the whole industry which is technological complexity ranges from the familiar, well known materials and trades through to highly complex facilities involving multiple interacting sub-systems. 1 The construction industry is that sector of an economy which constructs, alters, repairs and demolishes buildings, civil engineering works and other similar structures. 2 The construction industry also includes the assembly and installation on site of prefabricated components and building engineering services. 3 1 Murdoch, J. Construction Contract : Law and Management. 3 rd Edition. UK : E 7 FN Spoon, (2000), p Fadhlin Abdullah. Construction Industry & Economic Development: The Malaysian Scene. Universiti Teknologi Malaysia, (2004), p Ibid

19 2 The construction process involves three principal actors who are developer (or the client), the consultant and the contractor. 4 The consultant and contractor are drawn together by a common purpose to build a building project for a person or an organization called the client. 5 Once a project is completed and handed over to the client, their work end there. The construction process is often described in the basic terms: the owner pays, the designer designs and the contractor builds. This description is not entirely accurate. Generally, the general contractor s role certainly is critical, particularly in contractual, financial, and administrative matters, but the general contractor perform only a small portion of the hands-on work in the field. 6 Letting work to subcontractors is a very common practice in construction industry. 7 Sub-contracting as a phenomenon is not unique to the construction industry. Indeed, practice in the construction industry seems to be following in the footsteps of many other non-construction businesses. 8 Subcontractor work based on direction given by the main contractor and the works will carry out on behalf of the main contractor works. 9 In the construction contract, there are two nature of subcontractor which is nominated sub-contractor and domestic sub-contractor. 10 Nominated subcontractor was select by employer through the contract administrator. The selected person then will enter in to subcontracts with the main contractor. 11 Meanwhile, a domestic sub-contractor is one in whose selection and 4 Chow, Kok Fong. Law and Practice of Construction Contract Claims. Longman Sngapore, (1993), p Rosli Abdul Rashid. The Liability of Construction Project Manager and the Design Teams to the Clients and Buyers. University of Reading, (1988), p Ng, Chu Yin. Problems Associated with Nominated Subcontractors in Malaysian Construction Industry. Universiti Teknologi Malaysia, (2006), p Ibid 8 Murdoch, J. and Hughes, W. Construction Contract: Law and Management. 3 rd Edition. Spoon Press, (2000), p Coller, K. Construction Contract. New Jersey: Prentice Hall, (2001), p Lord Smith, J.P. Avoiding Claims in Building Contracts. London: Butterworth Architecture, (1994), p Murdoch, J. and Hughes, W. Construction Contract: Law and Management. 3 rd Edition. Spoon Press, (2000), p. 275.

20 3 appointment the employer normally plays no part, other than simply giving consent where there is required under the terms of the main contract. 12 The duties and responsibilities of the parties, who enter into the contract, are bound as stipulated in the contract which agreed in the earlier stage. The contract may be entirely in writing, entirely orally or partly in writing and partly oral. 13 In Malaysia construction industry, there are several choices of standard forms of main contracts 14 and also for nominated subcontract 15 yet there has never been any published standard form of domestic subcontract. Most of the subcontract between main contractor and domestic subcontractor are unpublished in house contracts, ad-hoc or one-off contract. 16 Domestic subcontracts are frequently entered into on most informal basis. Such contracts have provoked fierce criticism from trade associations representing subcontractors, as being one-sided to the point of unfairness. 17 One of the studies 18 was find out that one of the problems faced by domestic subcontractor is poor contractual terms. It s due to the non-standard form of domestic subcontract. Refer to the book of Construction Law in Singapore and Malaysia 19, the Standard forms have the following obvious advantages: a) They were originally drafted by the experts. 12 Murdoch, J. and Hughes, W. Construction Contract: Law and Management. 3 rd Edition. Spoon Press, (2000), p Syed Ahmad Alsagoff. Principle of the Law of Contract in Malaysia. Malaysian Law Journal Sdn. Bhd. (2003), p PAM 98, IEM, PWD-203 series, CIDB 2000, PWD-Design & Build/ Turnkey. 15 JKR 203N, CIDB.B (NSC)/ Sr. Noushad Ali Naseem Ameer Ali. Seminar on Model Terms of Construction Contract for Subcontract Work Puteri Pacific Hotel, Johor Bahru, (December 2006). 17 Murdoch, J. and Hughes, W. Construction Contract: Law and Management. 3 rd Edition. Spoon Press, (2000), p Chong, Jun Fah. A Study on Domestic Subcontractor. Universiti Teknologi Malaysia, (2006). 19 Robinson, Nigel M. Construction Law in Singapore and Malaysia. Butterworth: Singapore, Malaysia, Hong Kong, (1998), p. 6.

21 4 b) If successful, they enjoy a long life during which they are revised periodically to close the loopholes that are inevitably exposed in litigated disputes and thus they become increasingly reliable. c) Similarly, over their life-span they accumulate a body of case law which provides authoritative interpretation and explanation of their detailed provisions. d) They become familiar to practitioners, so that they may be used to advantage and known pitfalls avoided, their terminology gradually becomes part of the everyday language of the industry and tends to shape attitudes and relationships towards a readily recognizable pattern. Because there is no universally accepted standard form for domestic subcontracting works, CIDB has published the Model Terms of Construction Contract for Subcontract Work. The publication is timely and in line with the strategic recommendations in the Construction Industry Master Plan, CIMP to enhance professionalism and improve standards in the construction industry. 20 The drafting started on a blank sheet (screen actually) in The last few versions were in May 2006, August 2006, September 2006, and the final one in May 2007.There are many benefits of having standardized terms of contracts. The advantages include: 1. It becomes more economical as there is no need to draft new terms of contract every time a contract is let out. 2. It provides more certainty when tendering. 3. Familiarity makes it easier and quicker to be priced. 4. It creates the possibility of a more balanced allocation of risk between the contracting parties. 5. There is a higher chance of avoiding unwarranted disputes in court or arbitration. 20 The CICC Model Terms of Construction Contract for Subcontract Work Construction Industry Development Board (CIDB), May 2007.

22 5 1.2 Problem Statement Construction projects involve many parties namely the contractors, consultants, clients, suppliers, subcontractors and so forth. The main contractor normally sublet the works to the subcontractors to transform the risks. The relationship between the main contractor and subcontractors at times are problematic with the subcontractors at the mercy of the main contractor. 21 Domestic Subcontractors are often using non-standard form for their subcontract. Basically, the contract term was drafted by the main contractor. Many contractors impose their own standard terms on sub-contractors. 22 These often contain one-sided provisions which place the subcontractors at a disadvantage in a dispute. 23 Based on the empirical study 24, common complaints and disputes relate to such matters as wide ranging provisions under which contractor may deduct from monies due in respect of cross claims, domestic subcontract seldom involves the contract administrator appointed under the main contract but leave such matters as interim payments, extension of time and claims for loss and expense to be disputed by the contractor and subcontractor. Parties sometimes attempt to incorporate terms by reference to other documents, such as a standard form sub-contract with which they are familiar or the main contract itself. This may impose an unnecessary burden on the subcontractor whose contract may 21 Chong, Jun Fah. A Study on Domestic Subcontractor. Universiti Teknologi Malaysia, (2006). 22 Uff, J. Construction Law. 8 th Edition. London: Sweet & Maxwell, (2002), p Ibid 24 Murdoch, J. and Hughes, W. Construction Contract: Law and Management. 3 rd Edition. Spoon Press, (2000), p. 263.

23 6 bear no relation in size to main contract. 25 Such as the provision for liquidated damages. 26 For example, a main contract worth RM 1,000, may have a liquidated damage clause for delay of RM 10, per week. It would be unreasonable to expect the same level of damages from a subcontractor with a RM 50,000 contract. To address these problems, a standard form was introduced in United Kingdom, Australia, Singapore and other countries. The standard form is like for example JCT Standard Form of Domestic Subcontract 2002 Edition (DSC/C). In Malaysia construction industry, Construction Industry Development Board (CIDB) is also trying to avoid all the disputes arise by using non-standard from of subcontract. On 13 September 2006, the Minister of Works was launched the Model Terms of Construction Contract for Subcontract work published by the Construction Industry Development Board Malaysia (CIDB). One of the advantages of this model terms is there is a higher chance of avoiding unwarranted disputes in court or arbitration. There are a lot of questions should be asked before the model term is applicable into the industry such as: 1. Is it comparable to what is now being used by major contractors? 2. Can it solve the problem faced by domestic sub-contractor due to non-standard form of domestic subcontract? 3. Can it solve the current problem of relationship between main contractor and sub-contractor? From the above statement, the questions are, what is the problem faced by domestic sub-contractors due to the non-standard form of domestic sub-contract which is 25 Group of IT & T Department, Oriel Street. Forum on Public Procurement. 26 McGuinness, J. The Law and Management of Building Subcontracts. London: Athena Press, (2004), p. 15.

24 7 the contract term was draft by main contractor? Is the model term can resolve this problem? So, this study will be looking into the problems that faced by domestic subcontractors due to the non-standard form of domestic sub-contract based on cases reported and can the model term solve this problem? 1.3 Objective of Research From the problem statement, the following is the objective of the study: - 1. To determine the problem faced by domestic sub-contractors associated with the use of non-standard form of domestic subcontract. 2. To determine whether the use of CIDB form of Domestic Subcontract will reduce the problems. 1.4 Scope and Limitation of Research 1. The area of research is between Main Contractors and Domestic Sub-contractors in Construction Industry. 2. This Model Terms is most recent published in year There is no specific and related book discuss about this Model Terms before.. The information generally acquire from the seminar paper, journal and discussion with the expert in the industry.

25 8 1.5 Research Process and Methods of Approach Research process and method of approach will be used as guidelines so that the research could be done in a systematic way to achieve the research objective. The research process generally consists of 4 stages, i.e. 1 st stage: initial study and fixing research topic, objective, scope and outline, 2 nd stage: data collection and recording, 3 rd stage: data analysis and interpretation and 4 th stage: writing. The following will be the research process and the methods of approach used for this research (refer to figure 1.1) st Stage First stage of research involves initial study. Two approaches will be used in the initial study, i.e. discussion with friends and lecturers regarding what research topic can be done, and initial literature review to get idea of the research topic. After the initial study, the rough idea of the research topic is obtained. The objective and scope of the research are fixed then. Further to this, a research outline will be prepared in order to identify what kind of data will be needed in this research. Also, data sources will be identified as well nd Stage During this stage, data collection can be started. There are two types of data being collected, namely primary data and secondary data.

26 Primary Data Primary data collected mainly from Malayan Law Journal, Singapore Law Report, Building Law Report, Construction Law Report and other law journals. It is collected through the Lexis Nexis law database. All the cases relating to the research topic will be collected Secondary Data Secondary data is data obtained from research done by third parties other than the writer. Sources of secondary data consist of books, act, articles and seminar papers. These sources are important to complete the literature review chapter. (a) Books Books are the main secondary data sources. Books relating to contract between main contractor and domestic subcontractor, also book discuss about subcontracting will be read and understand to know in depth the theories relating to the research field. All the relevant books will be obtained from the library of University of Technology Malaysia. (b) Seminar Papers And Articles Seminar papers and articles will be the sources to strengthen the theories found in books especially paper from the workshop and forums which were conducted by CIDB in way to introduced the new Model Terms.

27 10 (c) The Model Terms of Construction Contract for Subcontract Work This model terms is an important source to support the literature review chapter and analysis done rd Stage 3 rd stage of research involves data analysis, interpretation and data arrangement. This process is to process and convert the data collected to information that is useful for the research. Arrangement of data tends to streamline the process of writing of the paper th Stage 4 th stage of the research is the last stage of the research process. It mainly involves writing up and checking of the writing.

28 11 1 st stage Initial Study Literature review and Discussion: Books, Journal, Internet Sources, Discussion with Friends and Lecturers. Fix the Research topic Fix the Research Objective, Scope and Prepare the Research Outline Identify type of data needed and data sources 2 nd stage Data Collection Seminar Paper Books Journal Data Recording 3 rd stage Data Analysis and Interpretation Data Arrangement 4 th stage Writing Checking Figure 1.1: Research Process and Methods of Approach